"China is becoming the global leader in electric vehicle adoption, and it is a market that is critical to Tesla's mission to accelerate the world's transition to sustainable energy," Musk said, according to a company statement coinciding with the ceremony for the Shanghai factory.
In Twitter posts before the event, Musk said that the factory will produce "affordable versions" of Model 3 and Model Y vehicles for the Greater China region, and that the plan is to "finish initial construction this summer, start Model 3 production end of year & reach high volume production next year."
According to the company, the so-called Gigafactory in Shanghai "will allow Tesla to localize production of Model 3 and future models sold in China, with plans to eventually produce approximately 3,000 Model 3 vehicles per week in the initial phase and to ramp up to 500,000 vehicles per year when fully operational (subject to local factors including regulatory approval and supply chain constraints)."
Musk's electric car maker acquired the land on the outskirts of the city for about $140 million in October. The luxury vehicle brand is popular in China but faces rising competition from local electric automakers such as Nio.
"Over the last six years, we have opened 60 Tesla locations, nearly 1,500 Superchargers, and more than 1,850 destination chargers in the country," the CEO said in the news release. "This week, we've started taking online orders for Model 3 in China, so that customers can configure their vehicle to take delivery in the weeks ahead, and Gigafactory 3 is another example of Tesla's commitment to the China market."
Producing vehicles in China would reduce costs from tariffs and ocean transport for Tesla. In an Oct. 2 report, the American company said it is operating at a 55 percent to 60 percent cost disadvantage for those reasons and because it cannot access the same cash incentives as local Chinese manufacturers.
Tesla's new factory is expected to begin partial production in the second half of this year, according to a government report. The company has set up official accounts on popular Chinese messaging and social media platforms WeChat and Weibo, which list more than 30 openings for positions at the Shanghai factory.
—CNBC's Eunice Yoon contributed to this report.